The end of the beginning? Private defined benefit pensions and the new normal

Jan 18, 2017 | REPORTS

This report explores the scale of the defined benefit pensions’ crisis, outlines its implications for firms and employees and considers possible solutions.

The collapse of BHS and concerns over the future of Tata Steel have put the sustainability of private sector defined benefit (DB) pension schemesfirmly into the spotlight. These types of DB schemes promise a set payment to their members in retirement based on salary and years of service, but there are growing concerns that many such schemes and their sponsors will be unable to fulfil their promises at a time of rising life expectancy and falling interest rates.

  • In the last decade, the asset allocation of DB schemes has dramatically shifted, from fixed interest bonds representing 28.3% of investments in 2006, to 51.3% in 2016.
  • Between 1989 – 2007 average real returns on UK government bonds were 4.1%. Between 2008 – 2016 the average was only 0.45%.
  • While some commentators maintain bond returns will increase, bond yields at home and abroad have been consistently falling since the 1990s, way before the financial crisis of 2008.
  • As of October 2016, 80.6% of DB schemes were in deficit [4]. Between 10-17% of these schemes are at serious risk of default.

With scheme liabilities rising faster than assets, firms may be diverting resources away from supporting the wages of current staff or making productivity enhancing investments in order to plug the pension deficit. But the alternative of capping pension scheme pay-outs could leave those in retirement caught short.

This dilemma sits at the heart of the challenge facing policymakers, regulatory officials, pension fund trustees, scheme members and wider society. In this context, this report, supported by Ince and Co, explores the scale of the DB pensions’ crisis, outlines what its implications have been for firms and employees and examines the prospects going forward. We conclude by offering some thoughts on solutions.

Rather than a technical paper, this report is intended to be a discussion piece in order to stimulate further debate on this highly important issue.

The report also reveals that is the money used to plug private DB pension scheme deficits between 2000 and 2015 had been redirected towards wages, average salaries could be £1473 higher, and examines the consequences of the new economic normal.

Ben Franklin, Head of Economics of Ageing, ILC-UK said:

“Adverse economic conditions and an unprecedented demographic shift towards an ageing society has put the sustainability of private sector DB schemes in doubt. Despite schemes being closed to new members, increased life spans and the persistence of a low interest rate environment means the issues surrounding private DB will not abate any time soon. We hope this report can kick-start a debate that leads a set of socially and economically acceptable solutions to the challenge. None of this will be easy, but simply hoping for interest rates to return to normal is futile.”


Authors: Ben Franklin and Dean Hochlaf